A government-appointed committee failed on Sunday to finalize a draft law that limits the number of those exempted from compulsory army service each year to 1,800 ultra-Orthodox scholars, instead of the tens of thousands of students who are let off annually now.

Military service exemptions are at the heart of a national debate in Israel over privileges enjoyed by the ultra-Orthodox, who have long wielded political influence in a country where coalition governments have often depended on their support.

"Any attempt to hamper the ... committee in order to pander to ultra-Orthodox politicians will lead to a breakup of this coalition," Yesh Atid's leader, Finance Minister Yair Lapid, told reporters during a meeting of his party's legislators.

"We will not participate in a government that does not pass a 'sharing the burden' law," he said.

The panel is divided over a proposed clause, backed by the centrist Yesh Atid party but opposed by Defence Minister Moshe Yaalon of Netanyahu's right-wing Likud, that would impose financial penalties on draft dodgers.

Netanyahu, speaking to Likud members of parliament, voiced confidence the differences would be ironed out.

"I am sure a solution can be found to the few clauses that remain unresolved. There will be a law," Netanyahu said.

Yesh Atid came second to Likud in a January general election on a pledge to reduce state benefits for Israel's fast-growing ultra-Orthodox minority and end military service exemptions for the community.

For the first time in a decade, Israel's government has no ultra-Orthodox members, and key coalition partners are pressing Netanyahu to break with political tradition and enact reforms.

"There is an historic opportunity to heal the wound that is bleeding in the heart of Israeli society," Lapid said, referring to the views of many secular Israelis that they are carrying the ultra-Orthodox on their backs.

Naftali Bennett, whose Bayit Yehudi party is another influential member of the coalition, said he was "very optimistic" the dispute over the draft legislation would be resolved.

Most Israeli men and women are called up for military service for up to three years when they turn 18. However, exceptions are made for most Arab citizens of Israel, as well as ultra-Orthodox men and women.

After the proposed law is signed off by the government committee, it will pass to the cabinet and then to the Knesset for approval.